Getting the money
Do Minorities Pay More for Mortgages?
Neil Bhutta & Aurel Hizmo
Federal Reserve Working Paper, March 2019
Abstract:
We test for discrimination against minority borrowers in the prices charged by mortgage lenders. We construct a unique dataset of federally-guaranteed loans where we observe all three dimensions of a mortgage's price: the interest rate, discount points, and fees. While we find statistically significant gaps by race and ethnicity in interest rates, these gaps are exactly offset by differences in discount points. We trace out point-rate price schedules and show that minorities and whites face identical schedules, but sort to different locations on the schedule. Such sorting likely reflects differences in liquidity or preferences, rather than lender steering. Indeed, we also provide evidence that lenders generate the same expected revenue from minorities and whites. Finally, we find no differences in total fees by race or ethnicity.
Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman's Savings Bank
Luke Stein & Constantine Yannelis
University of Chicago Working Paper, March 2019
Abstract:
This paper studies how access to financial services among a previously unbanked group affects human capital, labor market, and wealth outcomes. We use novel data from the Freedman's Savings Bank - created following the American Civil War to serve free Blacks - employing an instrumental variables strategy exploiting the staggered rollout of bank branches. Families with accounts are more likely to have children in school, be literate, work, and have higher occupational income, business ownership and real estate wealth. Placebo effects are not present using planned but unbuilt branches, or for Whites, suggesting significant positive effects of financial inclusion.
How Monetary Policy Shaped the Housing Boom
Itamar Drechsler, Alexi Savov & Philipp Schnabl
NBER Working Paper, March 2019
Abstract:
Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.
What Makes Financial Markets Special? Systemic Risk and Its Measurement in Financial Networks
Matthew Jackson & Agathe Pernoud
Stanford Working Paper, March 2019
Abstract:
We provide an overview of some key trends and features of financial networks related to systemic risk. We also provide a new network model of inter-dependencies, and use this to analyze the incentives that financial institutions have to choose the risk in their portfolios, their trading partners, and the correlation of their portfolios with those direct and indirect counterparties. We show that they have incentives to choose excessively risky portfolios, and to under-diversify in terms of choosing too few counterparties with whom to share risks. We also show that banks have strong incentives to perfectly correlate the situations in which their portfolios perform poorly, which generally increases systemic risk. We then provide a measure of financial centrality in terms of the consequences of a given institution's portfolio on the potential defaults of other institutions. We discuss minimum interventions or capital needed to ensure systemic solvency.
GDP-B: Accounting for the Value of New and Free Goods in the Digital Economy
Erik Brynjolfsson et al.
NBER Working Paper, March 2019
Abstract:
The welfare contributions of the digital economy, characterized by the proliferation of new and free goods, are not well-measured in our current national accounts. We derive explicit terms for the welfare contributions of these goods and introduce a new metric, GDP-B which quantifies their benefits, rather than costs. We apply this framework to several empirical examples including Facebook and smartphone cameras and estimate their valuations through incentive compatible choice experiments. For example, including the welfare gains from Facebook would have added between 0.05 and 0.11 percentage points to GDP-B growth per year in the US.
The Marginal Effect of Government Mortgage Guarantees on Homeownership
Serafin Grundl & You Kim
Federal Reserve Working Paper, April 2019
Abstract:
The U.S. government guarantees a majority of residential mortgages, which is often justified as a means to promote homeownership. In this paper we use property-level data to estimate the effect of government mortgage guarantees on homeownership, by exploiting variation of the conforming loan limits (CLLs) along county borders. We find substantial effects on government guarantees, but find no robust effect on homeownership. This finding suggests that government guarantees could be considerably reduced with modest effects on homeownership, which is relevant for housing finance reform plans that propose to reduce the government's involvement in the mortgage market by reducing the CLLs.
Does Price Regulation Affect Competition? Evidence from Credit Card Solicitations
Yiwei Dou, Geng Li & Joshua Ronen
Federal Reserve Working Paper, March 2019
Abstract:
We study the unintended consequences of consumer financial regulations, focusing on the CARD Act, which restricts consumer credit card issuers' ability to raise interest rates. We estimate the competitive responsiveness-the degree to which a credit card issuer changes offered interest rates in response to changes in interest rates offered by its competitors-as a measure of competition in the credit card market. Using small business card offers, which are not subject to the Act, as a control group, we find a significant decline in the competitive responsiveness after the Act. The decline in responsiveness is more pronounced for competitors' reductions, as opposed to increases, in interest rates, and is more pronounced in areas with more subprime borrowers. The reduced competition underscores the potential unintended consequence of regulating the consumer credit market and contributes toward a more comprehensive and balanced evaluation of the costs and benefits of consumer financial regulations.
Foreclosure Externalities: Have We Confused the Cure with the Disease?
Yishen Liu & Anthony Yezer
Real Estate Economics, forthcoming
Abstract:
Foreclosure externalities, in which recent foreclosures proximate to a housing unit depress its sales price, are well accepted in the literature. Past research on foreclosure externalities implicitly assumes that both the partial and total derivatives of the outcome (house value) with respect to the treatment (foreclosure) are equal and constant. This paper relaxes these assumptions about functional form. Results reported here show that the causes of foreclosure, mortgage delinquency and negative equity, also lower nearby housing prices. Because foreclosure eliminates delinquency and negative equity, it appears to be the cure for the externality rather than the cause. Delay in the foreclosure process prolongs the externality problem and slows price recovery just as delay in application of a cure makes the disease worse. These results demonstrate that functional form matters in testing for overall effects of policy changes.
Has Dodd-Frank affected bank expenses?
Thomas Hogan & Scott Burns
Journal of Regulatory Economics, April 2019, Pages 214-236
Abstract:
This paper examines the potential effects of the Dodd-Frank Act of 2010 on banks' noninterest expenses. Using data on U.S. bank holding companies from 1995 through 2016, we test whether noninterest expenses increase following the passage of the Dodd-Frank Act or in relation to the number of banking regulations implemented after Dodd-Frank. We analyze subsamples of banks above and below $10 billion in total assets and consider total noninterest expenses, salaries, non-salary expenses, and specific subcategories of non-salary expenses: legal, consulting, auditing, and data processing. Non-salary expenses for both large and small banks show a one-time increase after Dodd-Frank, while salary expenses tend to increase with regulations. The results indicate that total noninterest expenses for the banking system are higher on average by more than $50 billion per year compared to before the Dodd-Frank Act.
Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession
Adrien Auclert, Will Dobbie & Paul Goldsmith-Pinkham
NBER Working Paper, March 2019
Abstract:
This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.
Auto Credit and the 2005 Bankruptcy Reform: The Impact of Eliminating Cramdowns
Rajashri Chakrabarti & Nathaniel Pattison
Review of Financial Studies, forthcoming
Abstract:
Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform, as Chapter 13 bankruptcy filers can no longer "cramdown" the amount owed on recent auto loans. We estimate the causal effect of this anticramdown provision on the price and quantity of auto credit. Exploiting historical variation in states' usage of Chapter 13 bankruptcy, we find strong evidence that eliminating cramdowns decreased interest rates and some evidence that loan sizes increased among subprime borrowers. The decline in interest rates is persistent and is robust to a battery of sensitivity checks. We rule out other reform changes as possible causes.
Risk Management in Financial Institutions
Adriano Rampini, S. Viswanathan & Guillaume Vuillemey
NBER Working Paper, March 2019
Abstract:
We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that better capitalized institutions hedge more, controlling for risk exposures, both across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.